Sterling would rise under Labour government: Labour finance chief

Reuters
British Labour politician John McDonnell speaks to media outside the BBC headquarters after appearing on the Andrew Marr show in London

LONDON (Reuters) - Sterling would rise if the opposition Labour Party won an election, the party's finance policy chief John McDonnell told the Sunday Times, playing down the idea that a socialist government could trigger capital flight.

Britain's prolonged political crisis over Brexit has raised the likelihood of an early election and damaged the ruling Conservative Party's poll ratings. That has improved the once-distant prospect of the socialist-led Labour government.

McDonnell, right-hand man to Labour leader Jeremy Corbyn and would-be finance minister in a Labour government, said markets would not panic over his plans for new taxes, nationalisations and large-scale investment.

"I think what we'll see is sterling strengthening, if anything, as a result of the plans we've laid out," McDonnell told the newspaper.

Sterling, which has weakened since Britain voted to leave the EU in 2016, was under renewed pressure last week because of the growing possibility of interest rate cuts in the event of an unmanaged Brexit, with soft economic data adding to its decline.

Markets are concerned that Britain could end up leaving the European Union without a deal if the ruling Conservative party chooses Boris Johnson as its next leader.

Labour is opposed to a no-deal Brexit, wants a referendum on any exit deal Johnson negotiated and would campaign to remain in the EU over accepting his deal. But, the party has not decided whether it would cancel Brexit altogether if in power.

Ever since veteran socialist Corbyn was elected leader of Labour in 2015, many investors, banks and economists have warned that his plans could introduce uncertainty and disruption for the world's fifth largest economy.

McDonnell said in 2017 that Labour had to "scenario-plan" for capital flight and a run on sterling, even though he didn't think they were likely. Since then he has publicised regular meetings with banks and financiers to sell his economic plans.

"We know what our programme will be. The market will know well in advance and will react appropriately, and it won't be on the basis of capital flight or anything like that," he said.

Labour plans to nationalise industries such as water and mail delivery by issuing bonds in exchange for shares, and has outlined a 500 billion pound decade-long public investment plan.

(Reporting by William James; editing by David Evans)